Avis Acquires Zipcar: What Are the Implications?

In a sign of the increasing market for car-sharing, Avis car rental is expected to purchase Zipcar today for a tidy $500 million. With the acquisition, the car rental giant will begin offering short-term car rentals, as have competitors Global and Enterprise.

Car-sharing has the potential to help households make more trips via transit, biking, or walking, instead of using the car as the default choice for every trip. But is the Zipcar acquisition good or bad news for the shift to cleaner, more efficient modes? The short answer is that, at this point, it’s anyone’s guess and could still play out either way.

Since its founding in 2000, Zipcar has gained 760,000 members, the New York Times reports. It operates in 20 metro areas in North America and Europe, and on many college campuses.

Steven Pearlstein at the Washington Post’s Wonkblog predicts that Avis will basically wreck Zipcar by making it operate more like the parent company and less like the upstart that has appealed to car-lite customers who want to avoid the expense and hassles of car ownership. He also raises anti-trust concerns, pointing to the increasing concentration of the car-rental business in the hands of a few large firms.

If Avis uses Zipcar to expand the availability of short-term rentals in areas where car-sharing can replace car-owning, however, this could turn out to be good news. (Places like the west side of Cleveland could certainly use a convenient car-sharing service, hint, hint).

Matt Yglesias over at Slate writes that the merger will put the Zipcar business on sounder footing (the company turned its first profit last year), and predicts that Avis’s resources will immediately help smooth out some wrinkles in Zipcar service:

Zipcar’s big outstanding problem is that demand for Zipcars is highly spiky. People who want to use a car to commute to work are going to want to own their own vehicle. And people generally need to work during weekdays. Which means that demand for spot rentals is very highly concentrated on the weekends, which makes it hard for Zipcar to manage inventory efficiently. Avis says that combining its fleet with Zipcar’s will make it much easier to meet those demand peaks, as individual vehicles can switch from hourly rental to traditional rental on a day-by-day basis.

Yglesias also raises the question of whether Avis will be as active as Zipcar in lobbying for progressive policy changes like reducing parking minimums. The larger company may bring more firepower to those debates, he writes, or it may lack the same intensity of interest as Zipcar.

Zipcar and Avis could use pricing to help manage spiky demand. Weekends should cost more than weekdays if that’s when the highest demand exists.

shane phillips

I definitely thought Pearlstein overdid it on the naysaying. It’s certainly possible that the culture of Zipcar will be smothered by Avis, but it’s not at all clear that it’s inevitable. He was just trying to be as loud and confident as possible to get people to read his editorial, which is a tactic I generally despise. I’m not certain this will work out well for consumers, but for the reasons Yglesias notes, I’m hopeful.

Ari

This seems like good news. If Avis is paying $500,000,000 they want/expect Zipcar to succeed. Success means renting cars (by the hour or day).

We know the demand is there. If they fumble, someone else will pick up the pieces.

Adam Herstein

A bigger company buying out a smaller company rarely works out in the smaller’s favor.

In my experience, they already do use pricing to control spiky demand. In NYC, car rentals – both at Zipcar and at the legacy agencies – are much more expensive on the weekends. I don’t see how Avis taking over Zipcar would solve this problem.

Anonymous

Can someone remind me of an example of an acquisition where the *customers* of the smaller company benefited?

Youtube is probably the best example of that. It revolutionized the way the masses produced and consumed videos. Skype is another example.

Anonymous

In many markets (NY metro is an exception that rather confirms the rule), weekend demand for traditional car rentals (used mostly by out-of-town business travelers) plummets. So the fleet synergy arguments hold.

Just take a look of the huge number of sales, specials and what else traditional rental companies push on costumers under the form of “weekend deals”

Larry Littlefield

I rent from Avis and am a Zipcar member.

This could be good news for those in markets where there is a lot of weekday business travel. But in NYC, demand for both services is higher on the weekend, so it doesn’t help much.

Camp6ell

Zipcar was driven by being different and focused on customer service. Avis is the opposite. Is there anything else to consider?

GS

The simple alternative is to use the non-profit City Car Share (for those of you in San Francisco).

As many folks in the Carsharing industry have learned, it’s not so much a car business as it is an urban parking space business. Parking is incredibly finite and extremely expensive in most of the places where a car will get good utilization. In many cases, there are no spaces available at any price.

So the idea that they’re going to “solve” weekend availability overnight isn’t a slam dunk.
Avis will have to drastically change the customer experience and/or innovate if they’re going to quickly expand weekend car availability without increasing the number of parking spaces.

Anonymous

@facebook-100000432984719:disqus Avis has the financial capacity to even enter some agreements with cities to build special underground parking garages only for car-shares, for instance. It is several times bigger than Zipcar, is has a fleet that dwarfs the latter and thus can engage in bolder investments capitalizing on the car-sharing model.

In any case, I think car sharing might really take off when there is enough demand in a city to allow cars to be dropped off on different parking spaces than the ones cars were taken from. THAT would be a major improvement.

Yes, but the fleets that are idle on the weekends are nowhere near the urban locations that are the hallmark of carshare schemes like Zipcar. I can’t imagine that Avis will pay to drive dozens of cars each weekend from the airports to downtown locations (where would they park, for starters?).

Anonymous

This is a validation of the zipcar business, and also a much needed capital infusion for the company.
Whether or not the culture of Avis will overwhelm or destroy that of zipcar is impossible to say. To the extent that zipcar ends up responsible for a significant part of the revenues and profits of the combined company, it will probably retain its culture and business practices.

It’s true that a limiting factor in the NYC market is parking spaces for the cars, but there is a huge amount of potential to use on-street parking. Designating certain street parking as “zipcar only”, in return for payments to the city, could be a win-win. it could also be the first step toward a residential permit system and market-rate pricing for streetside space.

Anonymous

“Avis says that combining its fleet with Zipcar’s will make it much
easier to meet those demand peaks, as individual vehicles can switch
from hourly rental to traditional rental on a day-by-day basis.”

Hertz has separate locations and a separate fleet from Hertz On Demand (locations of which are generally within parking garages, same as Zipcar). If they haven’t combined their fleets in order to meet weekend demand spikes for Hertz On Demand, then I have to assume that there’s a good reason that they haven’t done so, and consequently have to guess that that reason, whatever it is (maybe the airport/downtown issue mentioned by @facebook-1054474092:disqus ) will be equally applicable to Avis and Zipcar and lead to their fleets not being combined either. I feel doubly strongly that this must be the case because Hertz HAS conventional car rental locations in Brooklyn Heights and Park Slope, in areas where Hertz On Demand could stand to have more vehicles available, and even those locations have no apparent connection or fleet sharing with Hertz On Demand.

Hopeful as I am that Avis will learn more from Zipcar than vice versa, it remains that a deal like this is likely the only way Zipcar could have continued in the long run.

The company has *never* made a profit. The WSJ(1) reports that cumulatively, it’s lost $57 million since its launch. As of Sept., Zipcar held ~50% more debt than it had in cash-on-hand —
not bankrupt, but a sign the company couldn’t borrow to
expand much more.

That it was able to scale up as big as it has, for as long as it did, is a testament to its incredibly appealing business model, dedicated staff, and unusually patient investors.

Whether Avis can make money from Zipcar will be interesting to watch. There are potential economies-of-scale benefits to be gained. For example, Avis likely pays less for its vehicles than does Zipcar. And Avis’ balance sheet offers financial options not available to Zipcar alone.

It would be good to know more about how the carshare programs of Hertz, Global, and Enterprise are faring — but i don’t think those financials are broken out.

Were it not Avis, another investor would’ve had to step in.

I really want carsharing to work, but as someone suggests below, it may be that a non-profit municipal model is the only viable path for this kind of service.

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